MANAGEMENT

Detailed explanation-1: -Cost of retained earnings is equal to Cost of equity. The cost of retained earnings is the earnings foregone by the shareholders. In other words, the opportunity cost of retained earnings may be taken as the cost of retained earnings.

Detailed explanation-2: -Retained earnings represents the capital left after paying out dividends. The opportunity cost of retaining earnings is dividends, and is therefore equivalent in cost to the equity that expects those dividends. As a result, understanding the retention ratio is dependent on deriving the dividend payout ratio.

Detailed explanation-3: -The cost of retained earnings is equal to the required rate of return on a firm’s outstanding common stock.

Detailed explanation-4: -Are retained earnings a type of equity? Retained earnings are a type of equity and are therefore reported in the shareholders’ equity section of the balance sheet. Although retained earnings are not themselves an asset, they can be used to purchase assets such as inventory, equipment, or other investments.

Detailed explanation-5: -The cost of issuing new common stock (Kn) higher than the cost of retained earnings (Ke) because of flotation cost. Both the cost of common stock and the cost of retained earnings are included in the cost of a firm’s equity capital.